Dow Ends at Record High as Fed Fuels Broad Rally

U.S. stocks rallied Wednesday, sending the Dow Jones Industrial Average® (DJI) to a record high close, after the Federal Reserve concluded its policy meeting with no change in benchmark rates and indicated it could lower rates about three times in 2024 as inflation eases. The S&P 500® index (SPX) and the Nasdaq Composite® (COMP) both ended near two-year highs.

Earlier Wednesday afternoon, the Federal Open Market Committee (FOMC) ended its two-day meeting and left its funds rate target unchanged at 5.25% to 5.5%, as expected. The Fed also released an updated economic forecast that included an outlook for slower GDP growth and suggested the central bank may lower the funds rate by about 75 basis points next year.

While the absence of a rate hike came as no surprise, the FOMC announcement combined with dovishly perceived post-meeting comments from Fed Chair Jerome Powell to fuel a broad market upswing reflected optimism that rates may have peaked and the economy may stick a “soft landing” that avoids recession.

The Fed’s restrictive monetary policy stance “is putting downward pressure on economic activity and inflation,” Powell said in the press conference following the end of the FOMC meeting. “We believe our policy is at or near its peak for the cycle,” he explained, adding that the Fed is “prepared to tighten policy further if appropriate.”

“It seems likely that the Fed is done hiking rates,” the Schwab Center for Financial Research said in a report.

Here’s where the major benchmarks ended:

• The SPX was up 63.39 points (1.4%) at 4,707.09; the DJI was up 512.30 points (1.4%) at 37,090.24; the COMP was up 200.57 points (1.4%) at 14,733.96.
• The 10-year Treasury note yield (TNX) was down about 18 basis points at 4.024%.
• The Cboe® Volatility Index (VIX) was up 0.14 at 12.21.

Financial shares led Wednesday’s gainers, reflecting ideas that lower interest rates will boost profit margins for banks. The KBW Regional Banking Index (KRX) surged nearly 6% and ended at its highest level in over four months. The Fed’s outlook for slower growth in 2024, but no recession, also appeared to drive optimism among smaller companies, which are considered to have greater exposure to economic downturns. The small-cap Russell 2000® Index (RUT) outpaced its bigger counterparts, gaining 3.5% and ending at a four-month high.

Treasury yields fell sharply, with the 10-year note dropping to a four-month low just above 4%.

Stocks on the move

The following companies had stock price moves driven by quarterly earnings, analyst ratings, or other news:

• Ally Financial (ALLY) jumped 8.3% and Capital One Financial (COF) rose 4% after Morgan Stanley upgraded its North American Consumer Finance industry view from “cautious” to “in-line,” citing expectations of slowing inflation and an end to Fed rate hikes, which could potentially ease pressure on low- and mid-income consumers.
• D.R. Horton (DHI) rose 3.1% after Keefe Bruyette upgraded the homebuilder from “market perform” to “outperform” and boosted its price target, citing expectations of a “sideways” housing market in 2024 that could lead to market share gains and stable margins.
• Incyte (INCY) rose 3.8% after investment bank Leerink Partners upgraded the stock from “market perform” to “outperform,” citing optimism over the biopharmaceutical company’s treatments for bone marrow diseases.
• Pfizer (PFE) fell 6.7% after the pharmaceutical company released full-year earnings and sales guidance that disappointed investors, reflecting a sharp drop in revenue from COVID vaccines.
• Tesla (TSLA) rose nearly 1%, erasing early declines that followed reports the company will recall more than two million vehicles to fix driver assistance system bugs.

Among other companies, digital publishing software maker Adobe (ADBE) was expected to report quarterly results after Wednesday’s market close. On Thursday, retailer Costco Wholesale Corp. (COST) and homebuilder Lennar Corp. (LEN) are expected to report results.

Rate cute expectations accelerate

Based on median estimates in the Fed’s updated economic forecast, central bank leaders expect GDP growth to slow from 2.6% in 2023 to about 1.4% in 2024 and the unemployment rate to rise from 3.8% in 2023 to 4.1% in 2024. The Fed also expects inflation to dissipate further, from 2.8% this year to 2.4% next year, based on Personal Consumption Expenditures (PCE) prices.

Investors appeared to seize another part of the forecast, the so-called dot-plot projection of Fed leaders’ expectations for short-term rates over the next few years. The dot-plot suggested the Fed will lower the funds target rate by 75 basis points in 2024. The previous dot-plot in September indicated just one quarter-point cut.

The dot-plot “implies 50 basis points more in rate cuts than what was expected three months ago,” according to the Schwab Center for Financial Research. “There’s a wide consensus for cuts next year.”

Powell nonetheless seemed to push back against notions the inflation battle has been won and the Fed is about to embark on an aggressive easing campaign.

“We’re committed to keeping policy restrictive until we’re assured inflation is on the path toward our objective,” Powell said during the press conference. “We need to see more. We need to see continued progress to get back to 2%,” which is the Fed’s long-term inflation target.

Beginning March 2022, the Fed raised its funds rate 11 times, to a 22-year high, as part of an effort to tame inflation that peaked above 9% in June 2022. The most recent hike was in late July.

Traders now expect to see a potential first Fed rate cut a few months sooner than they did earlier this week. Late Wednesday, futures traders priced a 75% chance the funds target will be at least 25 basis points lower following the FOMC meeting in March, up from 41% Tuesday, according to the CME FedWatch Tool.

Separately, inflation data released earlier Wednesday was consistent with other gauges in recent months, reflecting a gradual slowdown in price pressures over the past year. The Labor Department’s Producer Price Index (PPI) for November was unchanged from October for both overall and core rates, contrary to expectations for slight increases. The core rate excludes food and energy prices, which tend to be more volatile than other goods and services.